Should You Adjust Rent for Inflation? Nope. Here’s Why.

I keep a rent escalation clause in my leases. It states that the rent will rise by 3 percent each year, to keep pace with inflation.

When I wrote it, I had every intention of enforcing it. But I never have.

Should you raise the rent annually to keep pace with inflation? Personally, I’m starting to lean towards “no.” Here’s why.

Download Your FREE guide to evicting a tenant!

We hope you never have to evict a tenant, but know it’s always wise to prepare for the worst. Navigating the legal and financial considerations of an eviction can be tricky, even for the most experienced landlords. Lucky for you, the experts at BiggerPockets have put together a FREE Guide to Evicting Tenants so you can protect your property and investments.

#1: People Are Emotion-Driven

I used to think that I should definitely increase the rent each year. It’s only logical. Otherwise, every year the tenant is getting cheaper and cheaper rent in “real” dollars.

Unfortunately, people aren’t always logical creatures. Tenants tend to react emotionally to an increase in their rent (and the emotion is always negative!) They argue. They complain. They grumble. And perhaps – just perhaps – they contemplate moving out.

Of course, most people aren’t going to move out as a result of a one-time, $20 monthly rent increase. But if they think that their rent is going to rise each year, there will be a mental burden hanging over their head, incentivizing them to turnover.

#2: Vacancy is Expensive

Yes, I’ll lose a bit of money in “real dollars” as a result of inflation. But that’s nothing compared to even a single month of added vacancy.

Let’s say that one of my units rents for $1,000 per month. An increase of 3 percent adds an extra $30 per month, or $360 per year. But if the unit sits vacant for just two weeks as a result of that rent increase, either as a result of higher turnover or longer duration-between-tenants, I’ve just lost $500, and I’m netting an overall loss on my decision.

#3: Happy Tenants = Happy Landlord

As a general rule, the happier that your tenants are, the easier that your own landlording life will be. If I can keep my tenants happy by providing a nice home, keeping a steady rent, and responding quickly to calls, my tenants are more likely to continue living in my units, refer my other units to their friends, and treat the home well.

****
Of course, all this being said, I can still understand the case for enforcing an annual rent escalation, and I give kudos to the landlords who can execute this smoothly.

And I certainly think it’s reasonable to adjust rents upward every three to four years to offset inflation, particularly if the neighborhood comps justify the price.

I just don’t plan on raising my tenant’s rents when its time for their lease renewal. And I hope, in turn, that my tenants plan on re-signing on the dotted line.

Free eBook from BiggerPockets!

Join BiggerPockets and get The Ultimate Beginner's Guide to Real
Estate Investing for FREE - read by more than 100,000 people -
AND get exclusive real estate investing tips, tricks, and techniques
delivered straight to your inbox twice weekly!

About Author

Paula Pant quit her 9-to-5 job, invested in 7 rental units, and traveled to 32 countries. Her blog, Afford Anything, shares how to shatter limits, build wealth and maximize life. (At AffordAnything.com, she shares EXACT numbers from all her rental investments -- costs, cash flow, cap rate; it's all published for the world to read.) Afford Anything is a gathering spot for a tribe dedicated to ditching the cubicle. Read her blog, and join the revolution.

@Dan – You can raise the rent when a unit turns over. I recently had a tenant who was paying $1,050 per month move-out, and I raised the rents by $100 (after verifying that the market supported that rent). I didn’t raise the rent on the tenant while he lived there, and I wasn’t going to. But turnover was a great opportunity.

If a place doesn’t turn over, you can always raise the rent after 5 years or so … I think that’s more palatable to a tenant than an annual increase.

I’m really new at this business, but I’d think rather than 3 percent per year or a set rate of rent raising, it would make more sense to raise it when you change tenants. Especially if you have a month notice from a previous tenant. Advertise the first 2 or 3 weeks at the higher rate and keep it the same if no one bites on it. I’m sure something in my thinking is flawed, but I’m right with you on not having regular rent raising.

great points Paula.
perfect example is my father-in-law. he never raises rent, and the results are low or no vacancy. one of his tenants lived in one of his rentals for over 20 years. one very rare case but the tenants paid off the house for him and did the repairs! amazing. if i had to vote, i would vote anti-raise rents.

I am going to have to disagree with this article, but it would take an entire blog to list the reasons why. I will just say this, my parents had the same philosophy as you, and one of their rentals I inherited was paying $1,200 a month and everything in the neighborhood was over $2,000 a month. They were losing nearly $10,000 a year!!

I am with the belief of not raising rent. I also have a clause in my rental agreement for an annual rent increase. I have only used it on one tenant, a chronic complainer, but nothing to warrant an eviction, just hoping the increases will encourage her to move on. I also have a tenant that has been paying the same rent for 18 years. Sure I could raise the rent, however he pays his rent annually, early, no complaints, no problems. If he moves out, what kind of tenant might I get in his place???? I’d rather have the peace of mind having an excellent tenant over being greedy and making more money. Now when he moves of course the unit will be moved to the current rental rate.

I’m with Geoff. Keep rents stable for good tenants. For high-maintenance complainers and those who don’t care for the property very well, raising rent will either encourage them to move on, or provide compensation for the extra effort.

Whenever we’ve gotten new tenants, we’ve charged whatever the market will bear, then haven’t raised the rent. We’ve been able to keep excellent tenants for many years this way.

Bad tenants can cost a lot of money. Not only might they not take care of things, but they might actually damage things and cause you problems with the neighbors and the police.

Good tenants are worth their weight in gold, and keeping the rent steady helps keep good tenants. Rents declined quite a bit in the area for a couple of years, and other landlords had to lower their rents several hundred dollars a month, but our tenants were happy to stay with us and didn’t ask for a rent reduction, so we came out probably $300/month ahead because of not having had rent increases in previous years.

Remember, when your tenants leave, not only do you lose income because of vacancy, but you incur expenses such as spiffing the place up and doing credit checks. It also eats up your time, which is worth money, too.

Will we never raise the rent? I can’t say “never”, but over the last 15 years, we’ve been able to avoid it, even when my husband was laid off for over a year.

@Edie – That’s a great point: It works both ways. A tenant can always ask you for a rent reduction, and if you have a history of not raising rents on them, you also have a stronger case for not granting a reduction. More stability; less volatility.

As a low income housing provider raising the rent, every year will chase out a tenant of two. Replacing the tenant will require new carpet paint, repairs, advertising, and my time.
I bought these units for below the price of peanuts, so spending money on turn over is just dumb.
However when a tenant vacates the new occupant pays market rent, of course they are now enjoying painted floors (we don’t do carpet anymore) walls, and everything that was broken is now fixed.

I have a tenant now in residence for 8 years, he started out at a higher then market rent (sometimes you just get lucky) his rent is now $25 lower then market, but he has always paid the week before the first. I don’t think I will ever raise his rent unless the city puts some kind of onerous fee against my bottom line.

Here in the City of Brother Love the politicians have run out of things to tax, and have now moved on to taxing stationary items like RE in certain areas. As the new insanely high tax rates move through the political process I have been keeping my tenants informed. They all know they are going to get hit with a tax increase, and this will apply no matter where they move to. I have put it to them simply, this is a business, and business’ do not pay taxes, they collect them and pass the cost on to their customers.

I take a combined approach. Each year during the lease renewal, I review the market rent. If the market rent is basically the same as the current rent, I don’t raise it. Otherwise, I will but only a little bit. Usually though this doesn’t mean increases every year but rather every 2-3 years. This is a balance between constantly raising rent and not raising rent at all.

Thanks for the article. I take the position that I will re-evaluate the situation when it approaches the time when a rent increase can be applied. Open communication with tenants about the reasons why rents will be raised or why rents will not be raised for the coming year, treats the tenants like investors. They are, because they are investing in “you.” and the relationship you have established. I think this helps to create long-term tenants IMO.

@Charles — I’d agree with that. I’m open to telling tenants about the costs associated with landlording, like rising property taxes, high water and trash bills, etc. These are expenses that some tenants don’t think about, and so those conversations help them become aware of the overhead that goes into it. And then they may understand that a price increase is the result of me trying to keep up with rising overhead.

I usually end up raising rents every 2 years or if there is a vacancy. I do one year leases that end in the late spring. I will always get in touch early and let them know what I am thinking and then present them the new lease. I will also accompany this with a sheet describing what the rental market has done in the area as well as any improvements that have been completed. If there are any utility or maintenance costs that have incurred I pass that information along as well. I habe have had no vacancies for about 3 years now and I have only had a week in the 7 years and that week was to remodel a bathroom.

There’s a lot to be said for open communication. Most tenants can understand that your expenses have gone up, because theirs probably have, too. And if you need to raise the rent due to increased expenses, it’s best if you can make the resulting rent a little under market value, to give the tenants less incentive to leave. I also think that annually is too often — if I were a tenant, I could understand every 2-3 years more easily.

We spent a lot of time as tenants in the first half of our adulthood, so we try very hard to be the kind of landlords we would have wanted back then. In our opinion, the Golden Rule works in this situation, too.

My insurance and taxes go up every year, so shouldn’t rents go up at least enough that I don’t “lose money”?

Also, I’m a consumer too – my auto and home insurance premiums go up by $10-20 a month every year. Does that make me change insurance companies? Not often. But if they stayed the same for 4-5 years then jumped by $80-100 per month after 5 years, I would definately shop around. I think gradual is less of an incentive for the tenants to leave than a big increase every 5 years.

I agree Paula with happy tenants = happy landlord but like you, I have 6 units with almost no turnover. Although some tenants don’t mind paying higher rent if the place improves which is really the name of the game IMO.

I agree with you Paula, I’d raise my rent to match comps every 3-4 years and/or when there is a change in tenants if the market supported it. I have rented myself in the past and it was nice knowing when the lease came around to be renewed it didn’t automatically mean my rent was going up. As a renter, I really appreciated that.

Totally with you three – and I’d add – “ask your property manager, or if you don’t have one, ask one that works the area”. They know best – and it has nothing to do with inflation (which is a macro thing, and may have nothing to do with your particular area), and everything to do with supply, demand and affordability.

I am curious what the wording is for your rent escalation clause. I have always waited until a tenant moves out and then adjust rent for the new tenant. I thought it might be a good thing to add to my lease just in case. I heard from a friend that the clause is very common in California.